Monday, June 22, 2009

Superman money

A superman needs a super-sized salary. Stephan Hester, the CEO of the state-owned bank RBS, is so productive that he can demand a £9.6 million pay package.

Am I jealous? Well, maybe just a bit. However, I have genuine difficulty in understanding how such a preposterous salary could be granted to a public-sector employee.

The villains behind this shameful decision will argue that Mr. Hestor is an exceptionally gifted man and that talent does not come cheap. Besides, much of the payment will take the form of bonuses, which are related to specific targets. If Mr. Hester doesn't produce, he doesn't get paid.

Notwithstanding this superficially plausible argument, Mr. Hester would have almost certainly accepted a salary package half the size. The marginal productivity gain from each additional £1 million added to his salary would have been minimal.

So why do companies hand out such ludicrous packages. It stems from shareholder weakness. Each additional £1 million of salary paid to Mr. Hestor is £1 million less that can be paid out as dividends. Even in the good times, banks paid modest dividends. However, salary growth throughout the boom was phenomenal. Therefore, shareholders have an incentive to hold back these offensive remuneration packages yet are unable to do so.

Today, large corporations including banks are effectively controlled by small groups of management insiders. The control is most striking on executive compensation committees. With each passing pay round, more of the operating surplus of companies has ended up in the pockets of the management rather than shareholders.

But what about RBS -isn't there some kind of political control exercised over this public enterprise? Therein lies the true scandal of this pay package. UK Financial Investments, the body that controls the taxpayer’s 70 per cent stake in RBS, approved this incentive plan.

5 comments:

Well to be fair, most of the "compensation" is not vestable now. What discount would you put on RBS options years from now? What discount on RBS shares years from now? I bet the 9.6m figure is not discounted for risk or for net present value - especially coming off unions who are usually lying scumbags especially UNITE's Whelan... nothing like a good bit of outrage at "overpaid bankers" to distract.

On the other hand he is getting a cash payment of 1.2 million which is outrageous. Thats where the true outrage should be.

A man of talent? do me a favour. He came from British Land. And borrowing vast sums of money and ploughing it into real estate at inflated prices just before the whole thing collapsed, does not count as talent.

If he was talented, he would have been selling in 2007-2008, or atleast hedging his companies property exposure, but no, he acted like a kid with a credit card. Seen British Lands stock price? How smart would he look now if he was spending a few of the billions he got for selling assets, or a few billion from a hedge like Goldman Sacks did with their real estate portfolio. instead, the last act he did before parting was selling a load of equity, diluting the shareholders to pay margin calls on BL's land. And then he collected a multi million payout. the only man to make money out of BL. And probably gonna be the only one to make money out of RBS thanks to the boom in London property he took a large part in blowing up. Don't tell me it was the real estate bubble. Commercial property went up way more than residential, and is now down 45%.

Hardly the man to handle RBS property disposals, he never sold anything, just buy buy buy borrow borrow borrow right the way to the peak.